OBAMANOMICS IS A RECIPE FOR RECESSION

July 29, 2008

If the proposals espoused by candidate Obama ever became law, the American economy would suffer a serious setback, says Michael J. Boskin, a professor of economics at Stanford University and senior fellow with the Hoover Institution.

Obama would raise the top marginal rates on earnings, dividends and capital gains passed in 2001 and 2003, and phase out itemized deductions for high income taxpayers. He would uncap Social Security taxes, which currently are levied on the first $102,000 of earnings. The result is a remarkable reduction in work incentives for our most economically productive citizens, says Boskin:

The top 35 percent marginal income tax rate rises to 39.6 percent; adding the state income tax, the Medicare tax, the effect of the deduction phase-out and Obama's new Social Security tax (of up to 12.4 percent) increases the total combined marginal tax rate on additional labor earnings (or small business income) from 44.6 percent to a whopping 62.8 percent.

People respond to what they get to keep after tax, which the Obama plan reduces from 55.4 cents on the dollar to 37.2 cents -- a reduction of one-third in the after-tax wage!

Despite the rhetoric, that's not just on "rich" individuals, explains Boskin. It's also on a lot of small businesses and two-earner middle-aged middle-class couples in their peak earnings years in high cost-of-living areas. His large increase in energy taxes would disproportionately harm low-income Americans. And, while he says he will not raise taxes on the middle class, he'll need many more tax hikes to pay for his big increase in spending.

On dividends the story is about as bad, with rates rising from 50.4 percent to 65.6 percent, and after-tax returns falling over 30 percent. Even a small response of work and investment to these lower returns means such tax rates, sooner or later, would seriously damage the economy, says Boskin.